The Internal Revenue Service recently advised businesses to proceed with caution when engaging with tax credit companies instructing them to claim Employee Retention Credits they may not qualify for. Some third-party tax credit specialists submit incorrect ERC claims on behalf of unknowing clients, many of which amount to ERC fraud.

Most ERC scams are perpetrated by cottage-industry companies that rush to process your ERC credit without proving your business truly qualifies. Even worse, some will overclaim your credit in order to pocket a larger amount from your ERC refund. Most firms that practice Employee Retention Credit scams started up in the last two years specifically to abuse the ERC program. Should your business be audited in the future, these ERC scammers will not be around to account for their work.

In the IRS news release , Washington officials affirmed that businesses are always liable for their tax reports, and any company involved in an Employee Retention Credit scam will be responsible for future repayment with penalties and interest.

In and of itself, the Employee Retention Credit is not a scam. The ERC is a legitimate payroll tax credit still accepted by the IRS today. Created by the CARES Act to incentivize employers to retain workers throughout the pandemic, the ERC can still be claimed retroactively by amending payroll taxes from 2020 and/or 2021.

While the ERC is a real tax credit providing real tax refund checks to companies across the country, there are many illegitimate “ERC mills” advising businesses to claim credits they may not be entitled to.

By now, you have probably encountered an ERC advertisement on the radio or internet. ERC ads typically tout the maximum credit of $26,000 per employee. Many of these ads come from legitimate companies that service multiple tax credits with accuracy and integrity.

However, some inexperienced “ERC specialists” have popped up in the last year or two that seek to maximize their commissions at your expense.

Employee Retention Credit fraud is perpetrated in a few different ways. Some ERC providers make it standard practice to stretch the limits of tax law. Some may conduct honest work but take advantage of unsuspecting clients to pad their profit when the opportunity arises. In other cases, ERC fraud is committed unknowingly by in-house bookkeepers or accountants who lack experience with the ERC.

Many tax credit providers offer to determine whether your company qualifies for the ERC free of any up-front charges, instead taking a percentage of your tax refund once it is processed. The company will collect your relevant tax documents, conduct their due diligence, and make the necessary ERC calculations — and they may find your business ineligible for the ERC.

At this point, they have invested significant man-hours in your case for no payment in return. Unwilling to take the loss, ERC scam companies will instead claim that you do qualify, without providing the necessary evidence to the IRS. Unaware of this, you will be happy to learn you qualify for a sizable ERC refund check and send a percentage of it to your service provider. But if the IRS investigates your claim or your company is audited, you could be subject to tax penalties and interest.

If you encounter an Employee Retention Credit scam, you can report the information to the IRS using Information Referral Form 3949-A.

Claiming the Employee Retention Credit requires more analysis than just your payroll records — it’s not just a simple calculation and objective qualifications. Claiming the ERC involves open-ended eligibility guidelines that require employers and tax credit servicers to make subjective decisions that have serious financial implications. Partial suspensions, more than nominal impact, and other variables are all open to interpretation. This subjectivity makes the ERC susceptible to misjudgment, abuse, and even fraud.

Because of this gray area, the IRS will likely treat larger ERC claims with extra scrutiny. Claiming this tax credit without documented evidence will leave you vulnerable in a future IRS audit — especially if your ERC refund amount is in the millions.

Would you be able to remember each of your ERC qualifications several years from now? Keeping a detailed record of each ERC calculation and decision is the key to avoiding tax penalties. You must have an airtight document justifying your ERC claim that you can reference in an audit. If you qualified with declined revenue, you need your P & L statements on record. If you own multiple companies, you must show you aggregated the business’ income. If you qualified with an operations impact due to government order, you need a record of the relevant orders and proof of your modified operations. 

If your payroll provider or tax credit specialist filed the ERC on your behalf, you must ensure they provide you with such documentation. ERC providers who do not provide these audit-defense documents are, at best, leaving their clients at risk. At worst, they are running an ERC scam.

With all this concern about ERC scams, you must properly vet your ERC provider before doing business with them. Before agreeing to anything, ask the tax credit specialist the following questions to ensure their service is honest and accountable.

Many ERC providers have started up in the last two years, and these are typically the companies susceptible to ERC abuse. They don’t have the experience to make good judgments on open-ended ERC qualifications, and they likely don’t have the manpower to delve deeply into your business’s operations. The worst providers don’t really care if you truly qualify, because they will close up shop once the ERC expires.

The ERC has made tons of money available to businesses via tax refunds. Looking to get their piece of the take, a large number of ERC-only companies have popped up. These “ERC mills” rush to process as many ERCs as they can without conducting due diligence on their clients. If a company’s only service is ERC, it is possible they run an ERC scam.

If a tax credit provider qualifies close to 100% of their clients, they run an abusive practice. Simply put, not all companies qualify for the ERC, and if your company doesn’t qualify, it doesn’t qualify — period. If a provider is willing to bend the rules to make you qualify, they practice ERC fraud.

All legitimate tax credit companies provide defensible documents you can utilize in an audit. If your ERC specialist does not provide these documents, they may not be checking clients’ ERC qualifications at all. If they can’t “show their work” proving your company qualifies, how can you prove it to the IRS?

Omega Accounting Solutions performs a due diligence double-check for every client and prepares an audit-protection packet to defend each ERC claim. Omega does not run an ERC scam; they work with honesty and integrity to ensure your business truly meets the IRS’s official ERC qualifications. If your company qualifies, Omega’s tax credit experts know precisely how to build your ERC claim to easily survive an audit. Founded in 2007, Omega services multiple tax credits, including the Employee Retention Credit and Research and Development (R&D) tax credit.

The Employee Retention Credit is real. So are the unscrupulous “ERC Mills.”  Don’t miss out on money you are entitled to for retaining your employees during the pandemic. Choose an ERC provider that offers multiple services to support you for years to come. Choose a trusted advisor that you can count on — choose Omega.

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